Friday October 28, 2011
The Stock Market, as CNBC broadcast continually yesterday, is on track for its best month since the post 1987 recovery. The reasons for that are the extreme low level that the Summation Index hit August 8 and October 3-4 this year, the extreme volatility both up and down from fretting about Europe, and a final up down climax in the US Dollar, sending stocks first hard down then hard up, particularly yesterday.
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Here's the update. The red black lines are the US Dollar, the solid black line is the stock market via the SPX. Note the US Dollar made a higher low in August than in May at far left, the stock market took notice by dropping into Aug 8. The beaten down Dollar finally rallied six points on Euro woes. Stocks tanked right into October 3-4. Note the two blue circles that mark the Dollar High and Stock Low.
I used two blue arrows rather than a line that would make things harder to see. But the level was
1225 at left for stocks, and 76 at right for the buck. Do you see it? Stocks tanked right there when the Dollar went higher. Yesterday Stocks soared and the Dollar tanked as each crossed back over this important level. In fact one can literally see the buy stops in SPX and sell stops in the Dollar triggered right there, and so, ka boom, we had a big rally. But, it ain't over yet. Does anyone really think the Euro problems are solved, I don't.
I would guess the Dollar makes a higher low above 73.5. But let's not guess, let's let Mr. Market tell us where he wants to go.
The Dashboard, TLT, VIX SPX
We have used this Dashboard as a way to track how the markets react to one another. Yesterday two months worth of trading ranges were violated.
TLT at top broke down through its moving average
VIX broke down out of its range, I bounded it with the red green lines at top and bottom
AT bottom, SPX broke up out of its range.
We' ll let the talking heads ascribe whatever reasons they want for this but the idea of tech analysis is to let the charts do the talking, and yesterday they spoke loudly.
So now where are we..
SPX
Our Wave B Theory didn't pan it out did it? But overall we have been positive for higher highs and that is where the market is headed. It is getting overdone as shown by the MACD at bottom. This has been a huge move form 1075 to 1225 + yesterday. Amazing how fast the mood changes, eh? And so we are right back to, July 25 valuations. Lessons from the Fall.
Picking the eventual bottom is difficult. Believing that you will magically be at the terminal, execute all sorts of buy orders with split second precision, and capture that moment of glory is, fiction of the movies. When the summation index and our other internal indicators reach multi year lows it is imperative to have a succession of lower and lower buy limit orders to probe the lower depths and capture the low prices. Markets go irrationally lower, how can the entire valuation of the US Economy go from 1284 - 1075, 209 points which is 19% in one month, and the answer is,
the vagaries of human emotion tied to the ability to hit a button and buy and sell in a split second make this happen. Pile on 24/7 news coverage along with the seasonal low coming early this year and, well there you have it, welcome to Wall Street.
European stocks were off a smidgen this morning after the fireworks yesterday. We'll update things this weekend.
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